Stock Options

A contract of options is an agreement between two parts, in which one of them has the right to buy or sell an underlying asset (financial or not) in change of a premium. The other part is obliged, in exchange for perceiving the premium, to sell or buy, in case the buyer of the option so decides.

When the option gives you the right to buy it is called a buying option. The sales option is that which gives you the right to sell.

Also, the buyer of the option has the right, but not the obligation of buying (buying option or call) or selling (sales option or put) the underlying asset, at a previously prefixed price (exercise prices).

The option consists in accepting from the part of the buyer or from the vendor, of a difference against him on the price, denominated prime or premium, in exchange for having the right of demanding the counterpart the liquidation of the contracted securities at a know price (exercise price). With the option, the investor may reduce the risk of loss in an operation, in exchange of reducing also its benefit expectations. The options can be done over different types of assets, among which the shares are the most common as also are the merchandises, currency, stock exchange indexes, bonds, debentures or types of interest in the inter-banking system.

The merchandise options are done for more than a century, but the security options are relatively new. In Chicago, where there is a specialized market in financial options and that it is considered as the most important in the world. These type of operations are done since 1973. Other important markets for options are those of Philadelphia, Amsterdam and London.

The stock exchange authorities put in the option contracts the exercise price, the expiration date and the units of the transaction on the other hand do, who purchase the contracts determines through negotiation, the premium.

The options are divided according to the term in which they can be exercised. In European and American options. European options can only be exercised in expiration date of the option contract.. However, the American option can be exercised at any moment before its expiration.